Not sure what investments to choose? Know these 5 steps
Are you thinking about what investments to choose for your portfolio? That can be a tough decision. Let’s help you out with 5 simple steps to select the right investment for you.
Know what your goals are
Everybody has different goals, right Nikita? The first step to selecting the right investment is to identify your goals. They could be anything. Here’s a sample list.
- To buy a car
- To make the down payment on your first home
- To save tax
- To create a retirement fund
- To go on an international holiday
- To save up for your children’s education
You get the idea, isn’t it? So, start off by making a list of the goals that you want to meet. This will be the basic map to guide you to the right investment options.
Identify the timeline and the amount needed for your goals
Listing your goals is just the beginning. You also need to take care of two other important questions.
- By when do you wish to achieve these goals?
- And how much money do you need for these goals?
So, basically, the timeline and the amount.
The timeline will help you categorize your goals as long-term, medium-term and short-term goals. Based on this, you can pick the investment options that have similar timelines for maturity.
The amount will help you get a better idea of how much to invest, and what your expected returns on that amount are.
Let’s take the same set of goals we listed above, and assign a timeline and an amount to each one.
- To buy a car worth Rs. 5 lakh next year
- To make the down payment of Rs. 10 lakh on your first home, 3 years from now
- To save tax by at least Rs. 20,000 this year
- To create a retirement fund of Rs. 1 crore in the next 30 years
- To go on an international holiday with a budget of Rs. 4 lakh next year
- To save up Rs. 20 lakh for your children’s education in the next 8 years
See how these two factors give your goals more meaning and direction? This brings you one step closer to choosing the right investment options for you.
Check your risk tolerance level
What is risk tolerance you ask? That’s simple. It is the amount of money you can tolerate losing when you invest in an asset. This amount varies from one investor to another.
For example, say two investors invest Rs. 10,000 in a stock.
- The first investor is okay with losing up to Rs. 2,000 or say 20%.
- But the second investor cannot bear to lose more than Rs. 500 or say 5%.
Clearly, the first investor can take more risk than the second one. Based on how much risk they can bear, investors are one of three main types:
1. Conservative: Low levels of risk tolerance
2. Moderate: Medium levels of risk tolerance
3. Aggressive: High levels of risk tolerance
And luckily, there are investment types for each kind of investor. Equity, for instance, is generally considered a high-risk investment. After all, the stock prices can fluctuate. Fixed income instruments like Fixed Deposits and Bonds, on the other hand, are considered to have lower risks. So, you need to identify what your risk tolerance level is. This way, you can choose investments that match your risk profile.
Understand the different investment options
So, you’ve now identified your goals, your timeline and amount expected, and your risk tolerance. The next step is to check out all the investment options available and understand them.
Different investments come with different terms and conditions. Some have lock-in periods, while others have minimum or maximum investment amounts. There are also eligibility criteria to consider. And of course, there is the risk and expected return from each investment.
Look at all of these factors. Then, make a quick list of the investment options that meet your needs. That will narrow your options even more.
Determine your investment budget
Lastly, you need to be aware of how much you can invest. This is your investment budget. For this, you can use the 50-20-30 rule, where you invest 20% of your after-tax income. Or, you could simply invest whatever surplus amount you have each month, after meeting all your essential expenses.
This is really up to you. But ensure that you invest only what you can afford. Fortunately, there is no minimum amount needed for investing. You can get started with as much as Rs. 500 per month, too. If that’s what you can afford now, it’s a good idea to begin with that. Something is better than nothing, after all, right? Then, as your income increases, you can gradually expand your investment budget.
The bottom line:
By following these 5 steps, it will be easier for you to find the right investments. And, do keep in mind that over time, your goals, your risk tolerance and your budget will change. So, you need to revisit your investment choices and make changes, as needed. This will help you make the most of the investment options available to you.
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